Google Opens on Nasdaq

By ANDREW ROSS SORKIN and GARY RIVLIN

Published: August 19, 2004

Google, conceding that demand for its long-awaited public stock offering had fallen far short of the company's hopes, reduced the number of shares yesterday and concluded its unorthodox online auction by accepting a price well below its original target.

The final price was $85, far off the target range of $108 to $135 a share that the company projected last month. The shares are expected to begin trading today on the Nasdaq market.

When Google, operator of the Internet's most popular search service, announced its stock offering in the spring, many investors hoped it might mean a revival in the market for new technology stocks - a market all but dormant since the dot-com collapse of 2000. But a series of missteps and miscalculations by Google in the last month, as well as a big decline in technology stocks lately, turned many investors into skeptics.

The pared-down offering, which cut the number of shares to 19.6 million from 25.7 million, will raise $1.66 billion for Google, its founders and some of its early investors. That places the company's total worth at $23 billion. Only three weeks ago, the company and its bankers had valued the company as high as $36 billion and said they hoped to raise as much $3.6 billion.

Two of Google's big early investors, the storied Silicon Valley venture capital firms Kleiner Perkins Caufield & Byers and Sequoia Capital, decided to withdraw their combined 4.5 million shares from the auction early yesterday, betting they can get a better price at some point in the future.

The big question when the shares begin trading in the Nasdaq market will be whether the stock price receives a big opening-day run-up. That is something Google's executives and bankers had sought to avoid by holding an online auction and setting such an initially high target price. The lowered price could now allow room for a big first day, although many analysts say that Google's well-publicized scaling back could give the public pause, or even send the shares down further in today's trading.

"Google should have repriced this thing a couple of weeks ago," said Andrew M. Schroepfer, president of Tier1 Research, a financial research firm specializing in technology. "What they found out from the marketplace is that they need to prove themselves before they start trading at the kind of multiple they were looking for."

The lower-than-expected price per share may be disappointing to stakeholders in Google, including the founders, Larry E. Page and Sergey Brin, who started the company in 1998 while graduate students at Stanford University. But Silicon Valley financiers dismissed any suggestion that a more modestly priced Google reflected badly on the technology industry.

"When you can get a brand new stock public at over a $20 billion valuation, there's nothing wrong with that market," said Sanford Robertson, a founding partner at the investment firm Francisco Partners, based in Menlo Park, Calif., and a co-founder and former chairman of the investment bank, Robertson, Stephens & Company.

"I think the story here is the company finally got down to the right place, price-wise," Mr. Robertson said. "This is still a terrific valuation. This is still a very, very big price."

Michael Moe, the chief executive of ThinkEquity Partners, a boutique investment bank based in San Francisco, took a similar view: "Even at $85 a share, this is a remarkable win for Google. Google is going to raise $1.8 billion, which is a giant win for a company that didn't exist six years ago."

The decision to scale back the offering was made late Tuesday night after a presentation in which the underwriters, Morgan Stanley and Credit Suisse First Boston, briefed Google's executives and chief investors about the status of the auction. It was the bankers who recommended repricing the deal, according to two executives briefed on the discussion.

A flurry of conference calls ensued, involving Google's founders and its chief executive, Eric Schmidt; the bankers; and principals at Kleiner Perkins and Sequoia. The calls, according to the two executives briefed on them, included heated exchanges in which the various parties blamed one another for miscalculating the demand for the offering.

The problem-plagued offering raises questions about whether Google erred in deciding to flout Wall Street's conventional way of taking a company public: investment banks underwrite the stock, set the price and distribute many of the shares to chosen clients, friends and family members.

Google, whose S.E.C. filings pledged a "Don't be evil" philosophy, said its so-called Dutch auction of shares online would democratize the distribution of its stock, while achieving the best price for the company's stakeholders. In a Dutch auction, all bidders end up paying the same price - the highest price that assures that all shares will be sold.

"It seemed clear to many from the start that the Dutch auction process for such a high-profile, consumer-oriented company like Google - with an unseasoned management team - was a recipe for failure," said Hulus Alpay, who counsels companies about to go public as the head of investor relations at Makovsky & Company, an investor relations and public relations firm.

Google's executives, bound by the S.E.C.'s "quiet period" rules for companies about to go public, have been unable to comment.

To at least some, the company is finally being priced at a value that more accurately reflects its true value. "The real story of what happened here is the deal is finally being priced where the bankers would have put it had they been in charge of this deal from the beginning," said one investment banker, who owns a small slice of Google through his stake in one of the venture capital funds that was an early Google investor. He insisted on not being identified because he has investment banking colleagues involved in the deal.

Despite Google's stated democratic ideals, some investors studying the offering documents grew wary. Google is issuing two classes of stock, so that the founders can retain far more voting control - giving the public shareholders a very limited say in the way the company is run - than is often the case when companies are publicly traded in the stock market. Some media companies, though, including The New York Times Company , use such a two-tier stock structure.

Many investors had also grown leery of the auction's complexities. Many of the 28 brokerage firms underwriting it seemed to have different policies about placing bids.

The offering has been further tarnished by brushes with the S.E.C. Yesterday, Google disclosed that the S.E.C. had requested additional information about an interview the founders gave to Playboy magazine in the spring shortly before the company's public filing. The interview may have violated securities laws because it included discussion of company information not included in the offering prospectus.

On Monday, the company said informal state and federal inquiries were under way into the way Google distributed stock to employees in the years before the offering.